Stock market volatility and learning

Klaus Adam, Albert Marcet and Juan Pablo Nicolini

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We study a standard consumption based asset pricing model with rationally investing agents but allow agents’ prior beliefs about price and dividend behavior to deviate slightly from rational expectations priors. Learning about stock price behavior then causes the model to become quantitatively consistent with a range of basic asset prizing ‘puzzles’: stock returns display momentum and mean reversion, asset prices become volatile, the price-dividend ratio displays persistence, long-horizon returns become predictable and a risk premium emerges. Comparing the moments of the model with those in the data using confidence bands from the method of simulated moments, we show that our findings are robust to different assumptions on the system of beliefs and other model features. We depart from previous studies of asset prices under learning in that agents form expectations about future stock prices using past price observations.

Keywords: asset pricing; learning; near-rational price forecasts (search for similar items in EconPapers)
JEL-codes: D84 G12 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2011-09-19
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Downloads: (external link)
http://eprints.lse.ac.uk/121739/ Open access version. (application/pdf)

Related works:
Journal Article: Stock Market Volatility and Learning (2016)
Working Paper: Stock Market Volatility and Learning (2015)
Working Paper: Stock Market Volatility and Learning (2015)
Working Paper: Stock Market Volatility and Learning (2012)
Working Paper: Stock Market Volatility and Learning (2011)
Working Paper: Stock Market Volatility and Learning (2008)
Working Paper: Stock market volatility and learning (2008)
Working Paper: Stock Market Volatility and Learning (2007)
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